Exec Life Saga Still Shadows Garamendi

Life is short, but (to paraphrase a Latin epigram) litigation is loooong.

Anyone wishing to know how eternity feels in legal terms need only refer to the lawsuits and prosecutions that have sprung from the carcass of Executive Life Insurance Co. of California, a onetime highflier that state Insurance Commissioner John Garamendi seized in 1991, ostensibly because it was insolvent.

Garamendi is currently planning a run for lieutenant governor, but it’s hard to believe that his stewardship of Executive Life will be prominently displayed on his resume. To the insurer’s former policyholders, his involvement has looked progressively worse with the passage of time.

The last lawsuit standing, in which the French firms to which Garamendi sold Executive and its portfolio of junk bonds are charged with fraud, is currently limping to a close in a Los Angeles courtroom. There, U.S. District Judge A. Howard Matz last week threw out a jury’s $700-million punitive judgment against the French company that ended up with the Executive Life assets. (He said it was devoid of “rational explanation.”) Matz is still pondering Garamendi’s demand for $1.2 billion in restitution from the company, but he has already expressed skepticism about the state’s claim.

If Matz rejects the claim, about $702 million from prior civil settlements and fines will be available to distribute to up to 330,000 Executive Life policyholders. That’s a pittance compared with the $4 billion to $4.5 billion they’ve arguably lost since the company’s failure. The toll has been great: Some have lost their homes; others have forgone medical care that was to have been guaranteed by the income from Executive Life annuities. On the other hand, the buyers of the junk bonds have profited by as much as $1.76 billion.

This intricate debacle began with First Executive Corp., a Beverly Hills company run by a very sharp investor named Fred Carr. In the 1980s, First Executive joined the junk-bond financing circle created by Michael Milken at the investment firm Drexel Burnham Lambert. Milken perceived brilliantly that junk bonds, which carried sky-high interest rates, weren’t just for junk companies; they could be used to provide capital for growth companies too. Outfits like First Executive were the key to keeping this market liquid -- they issued junk bonds for their own capital and used some of the proceeds to buy junk bonds issued by other Milken clients.

The circle started imploding in 1989, in part because Milken and some of his associates had been accused of operating a big insider-trading scheme. Junk bond prices plunged. First Executive reported huge losses in its portfolio, provoking customers of its Executive Life of California unit to stage the equivalent of a run on the bank. After Garamendi seized the subsidiary in 1991, he sold it along with its bond portfolio to a consortium of French firms. The sale terms, he indicated, would protect the policyholders’ interests.

But Garamendi had been rooked. In 1998, a whistle-blower revealed that the buyers had been fronts for the French bank Credit Lyonnais, which as a foreign company was barred by law from buying Executive Life. U.S. prosecutors, California Atty. Gen. Bill Lockyer, and Chuck Quackenbush, Garamendi’s successor -- and predecessor -- as insurance commissioner, all pursued the perpetrators. Credit Lyonnais and various of its partners have since signed numerous plea bargains and civil settlements, including a record- setting $772-million settlement with the feds in 2003.

Garamendi’s spokesmen say that, had he known the truth, he would have sold the company and its portfolio to an alternate bidder. Still, the real losses may not be due to his unwitting deal with an illegal buyer, but to the price he negotiated. His critics argue that he let the bonds go in a fire sale. In other words, he locked in the policyholders’ losses and allowed the buyers to reap huge profits instead.

Some have suggested over the years that Garamendi was unduly influenced by the investment firm Apollo Advisors, which was partnering with the French buyers to acquire the portfolio.

Apollo had the jump on Garamendi, according to this theory, because Leon Black, its co-founder, had worked with Milken and therefore had intimate knowledge of the values buried in the junk bond portfolio and concealed from the commissioner. Indeed, Lockyer’s lawsuit contended that Apollo persuaded Garamendi that the junk bonds were losing value for every day that passed without a sale. In fact, Lockyer argued, Apollo knew their value was actually increasing. (Lockyer’s lawsuit was dismissed on a technicality. Apollo didn’t return my call for a comment.)

Garamendi’s spokespersons say he didn’t rely on Apollo for advice, but on his financial consultants, New York-based Blackstone Group. But Blackstone sources have said they advised him that policyholders would be best served by holding on to the bonds until prices recovered, not by hastily selling them in a block.

Garamendi “was advocating selling at the worst of all possible times,” says David Batten, then a general partner at Blackstone. But the commissioner seemed predisposed to make the sale, no matter what. “We figured out pretty early that we were the ants at the picnic,” Batten told me.

Garamendi’s supporters say that critics of the deal are working with 20/20 hindsight.

The truth may well be lost in the mists shrouding a situation that seemed incredibly complicated even in 1991 and has only grown murkier since then. The only thing that’s clear is that for the policyholders, the Executive Life case is the gift that keeps on taking away.